United (NYSE:UAL) Stock Is Telling Two Stories, Be Sure You Choose the Right One

United Airlines (NYSE:UAL) reports its fourth quarter 2020 earnings after the market closes on January 20, 2021. The airline is expected to deliver more of the same news that has defined the prior two quarters. That is, weak revenue and negative earnings.

However, like many airlines including Delta Air Lines (NYSE:DAL), United has become adept at lowering expectations. That means that less good can come in better than expectations. For what it’s worth, analysts project United to deliver $3.4 billion in revenue resulting in a pretax loss of $2.5 billion, or -6.66 in adjusted earnings per share. The revenue number would be a nearly 70% year-over-year decline for the airline.

That being said, UAL stock briefly popped this morning before meandering slightly lower as we neared midday trading. And there are some analysts that believe United stock may go up if the company simply meets the low expectations it is giving investors.

UAL Stock is Telling Two Stories

If you were a contrarian investor that bought UAL stock at the onset of the Covid-19 pandemic, you’ve been rewarded to a gain of over 100%. That’s great considering that, due to its acceptance of money in the CARES act, United is limited in what it can give back to shareholders in the form of buybacks. And the stock has not issued a dividend since 2001.

However, trading at just over $45 at the time of this writing, UAL stock is down nearly 50% from its 52-week high.

Both of these statements are facts. However, I believe only one of them is directional in terms of what to expect from UAL stock in the near term. And that is the latter. United stock has made a nice run but in order for it to move significantly higher, it needs three things to happen.

The Pandemic Must End

One reason why investors could afford a contrarian bet on travel stocks such as airlines and cruise ships is because it’s widely assumed that the pandemic won’t end travel as we know it. It’s simply a bump in the road (although quite a big pothole).

To move forward, the airlines need to turn hope into concrete action. And that is coming, but it’s happening slower than expected. On the one hand, it’s not unfair to call it a miracle that there are not one, but two (and soon to be three) vaccine candidates. But the logistics of a nationwide vaccination campaign are daunting and there is still is some skepticism among Americans about the risk-reward in taking the vaccine.

And airlines are finding themselves, perhaps unintentionally, in the midst of a growing controversy of whether passengers will be required to have an electronic record of their vaccination that must be presented before flying. While this would certainly ease concerns about flying safety, it could also delay the rollout of the vaccine.

Business Travel Needs to Return

Bill Gates has said that as much as 50% of business travel may never return after the pandemic. That’s sobering news for an airline like United that relies on business travel for a significant portion of its revenue. According to the trade group Airlines for America, business travel is 60% to 70% of the industry’s revenue.

I believe business travel will return at some level. However, videoconferencing to a business is like e-commerce to a consumer. There will be many instances where businesses will find little value add to a business trip that can be handled in a virtual setting.

The Economy Needs to Stabilize

The view of many analysts is that the stock market may do well at least in the first 12 to 18 months of the Biden administration. The market will be flooded with stimulus and interest rates are low being two catalysts.

Indeed, we may have already exited the recession we entered back in the summer, but the view on Main Street suggests that things are far from healthy. Unemployment remains high as many businesses remain closed and others may never re-open.

The simple takeaway is that flying is a luxury that many consumers will curtail if the budget needs to get cut. And that’s not good news for United or any airline.

The Bottom Line on UAL Stock

If you’ve been invested in United, a post-earnings pop in the stock may be a good time to take your profits and go. The stock has likely run as far as it can. Make United deliver good news and not just less bad news before deploying your capital in the company’s stock.